Like Aesop’s boy who cried wolf, the MOF has lost credibility, at least when it comes to the threat of intervention in currency markets. So speculators remain convinced that they are making a one-way bet – win big or break even – and continue to push the yen higher.
At this point, the MOF’s words will not be enough to deter speculation. But the MOF remains hesitant to back its tough talk with action, not least because of American disapproval of supposed “currency manipulation.” High-level officials at the US Treasury and Federal Reserve actively try to dissuade advocacy of direct intervention, including by me. An American scholar reacted angrily when I merely mentioned the word, as if it were an obscenity. American officials, for their part, emphasize that if Japan can be accused of manipulating currency markets, the US Congress will not approve the Trans-Pacific Partnership (TPP).
It is possible that the MOF will choose to keep the US on its side, and continue to offer only empty threats to speculators. Or it may simply vacillate until it is too late to take real action. Either approach may well produce the same disastrous result: allowing the yen to appreciate to damaging levels and causing Abenomics to fail.
What the MOF should do is intervene courageously in currency markets to stem the yen’s appreciation. Speculators will learn a tough lesson, and Japan’s economy could get back on track. Though Japan may become a scapegoat for the failure of the TPP, it seems unlikely that the deal would be ratified in any case, given the current political climate in the United States. An alternative would be for the BOJ to purchase foreign securities.
Many hedge-fund managers, along with some economists, claim that the key to saving Japan’s economy from deflation is a more direct helicopter drop, with newly printed cash delivered directly to consumers. Yet these same people are impeding effective macroeconomic policy, by betting on the yen’s appreciation. Only when the speculators are brought to heel should such a bold – and highly risky – monetary policy even be up for discussion.